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Prepare the journal entry to record the original issuance of the convertible debentures. 2. Prepare the journal entry to record the exercise of the conversion option, using the book value method

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On January 1, 2015, when its $30 par value common stock was selling for $80 per share, a corporation issued $10 million of 14% convertible debentures due in 10 years. The conversion option allowed the holder of each $1,000 bond to convert it into six shares of the corporation’s $30 par value common stock. The debentures were issued for $11 million. At the time of issuance, the present value of the bond payments was $8.50 million, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2016, the corporation’s $30 par value common stock was split 3 for 1. On January 1, 2017, when the corporation’s $10 par value common stock was selling for $90 per share, holders of 40% of the convertible debentures exercised their conversion options. The corporation uses the straight-line method for amortizing any bond discounts or premiums.

Required:

1. Prepare the journal entry to record the original issuance of the convertible debentures.

2. Prepare the journal entry to record the exercise of the conversion option, using the book value method.

 
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Shamrock Company had net income of $30,000. On January 1, there were 8,000 shares of common stock outstanding.

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1. Shamrock Company had net income of $30,000. On January 1, there were 8,000 shares of common stock outstanding. On April 1, the company issued an additional 2,000 shares of common stock. There were no other stock transactions. The company has an earnings per share of: (Points : 2)
$3.75
$3.00
$3.33
$15.00
$3.16

2. When a bond sells at a premium: (Points : 2)
The contract rate is above the market rate
The contract rate is equal to the market rate
The contract rate is below the market rate
It means that the bond is a zero coupon bond
The bond pays no interest

3. If an issuer sells a bond at any other date than the interest payment date: (Points : 2)
This means the bond sells at a premium
This means the bond sells at a discount
The issuing company will report a loss on the sale of the bond
The issuing company will report a gain on the sale of the bond
The buyer normally pays the issuer the purchase price plus any interest accrued since the prior interest payment date



4. The amount of income earned per share of a company’s common stock is known as: (Points : 2)
Restricted retained earnings per share
Earnings per share
Continuing operations per share
Dividends per share
Book value per share


5. To provide security to creditors and to reduce interest costs, bonds and notes payable can be secured by: (Points : 2)
Safe deposit boxes
Mortgages
Equity
The FASB
Debentures


6. Promissory notes that require the issuer to make a series of payments consisting of both interest and principal are: (Points : 2)
Debentures
Discounted notes
Installment notes
Indentures
Investment notes

7. A company has net income of $850,000. It also has 125,000 weighted-average common shares outstanding and a market value per share of $115. The company’s price-earnings ratio is equal to: (Points : 2)
16.9
14.7
92.0
13.5
8.0





8. Which of the following statements is true? (Points : 2)
Interest on bonds is tax deductible
Interest on bonds is not tax deductible
Dividends to stockholders are tax deductible
Bonds do not have to be repaid
Bonds always decrease return on equity


9. A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value factor for an annuity for 7 years at 9% is 5.0330. The present value of the loan is: (Points : 2)
$9,000
$5,033
$63,000
$57,330
$45,297


10. A company’s board of directors’ votes to declare a cash dividend of $0.75 per share. The company has 15,000 shares authorized, 10,000 issued and 9,500 shares outstanding. The total amount of the cash dividend is: (Points : 2)
$375
$4,125
$7,125
$7,500
$11,250


11. Stock that was reacquired by the company and is still held by the issuing corporation is called: (Points : 2)
Capital stock
Treasury stock
Redeemed stock
Preferred stock


12. A corporation was formed on January 1. The corporate charter authorized 100,000 shares of $10 par value common stock. During the first month of operation, the corporation issued 300 shares to its attorneys in payment of a $5,000 charge for drawing up the articles of incorporation. The entry to record this transaction would include: (Points : 2)
A debit to Organization Expenses for $3,000
A debit to Organization Expenses for $5,000
A credit to Common Stock for $5,000
A credit to Contributed Capital in Excess of Par Value, Common Stock for $5,000
A debit to Contributed Capital in Excess of Par Value, Common Stock for $2,000

 
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Direct material/direct labor/factory overhead/SG&A B-17.04 Perfect Pad manufacturers floor mats

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Perfect Pad manufacturers floor mats for trailers that are used to transport horses. The mats provide for a firm footing surface that quickly sheds water. Mats are made to customer specifications via orders submitted over an internet site. The mats are completed and shipped in about one day. As a result, Perfect Pad does not maintain any work in process or finished goods inventory. The following costs were incurred in producing and selling mats during August: Synthetic rubber used in the mat $134,300 Lubricant used in the molding machine 14,000 Factory rent 9,600 Electricity to run the molding machine 2,600 Labor cost of machine operators 34,100 Internet sales site 1,500 Administrative salaries 12,500 Depreciation of molding machine 7,400 Salary of factory safety inspector 3,500 Office rent 13,500 Evaluate these costs, and determine the amount of direct material, direct labor, factory overhead, and selling/general/administrative costs. Next, identify how much is considered to be a “prime cost” and how much is considered to be a “conversion cost.

 
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Company cash flow evaluation B-16.12 Waguespack Corporation and Hedrick Corporation

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Waguespack Corporation and Hedrick Corporation had identical cash positions at the beginning and end of 20X9. Each company also reported a net income of $150,000 for 20X9. Evaluate their cash flow statements that follow. Which company is displaying elements of cash flow stress? What factors cause you to reach this conclusion? What is the importance of evaluating a company’s cash flow statement? Knowledge of cash flow statement components B-16.11 Company cash flow evaluation B-16.12 WAGUESPACK CORPORATION Statement of Cash Flows For the Year Ending December 31, 20X9 Cash flows from operating activities: Net income $150,000 Add (deduct) noncash effects on operating income Depreciation expense $ 20,000 Gain on sale of equipment (185,200) Increase in accounts receivable (45,000) Decrease in inventory 37,500 Increase in accounts payable 11,400 Decrease in income taxes payable (3,000) (164,300) Net cash provided by operating activities $ (14,300) Cash flows from investing activities: Sale of equipment 204,900 Cash flows from financing activities: Proceeds from long-term borrowing 20,000 Net increase in cash $210,600 Cash balance at January 1, 20X9 66,000 Cash balance at December 31, 20X9 $276,600 HEDRICK CORPORATION Statement of Cash Flows For the Year Ending December 31, 20X9 Cash flows from operating activities: Net income $150,000 Add (deduct) noncash effects on operating income Depreciation expense $160,000 Decrease in accounts receivable 43,700 Increase in inventory (87,500) Decrease in accounts payable (8,100) Decrease in income taxes payable (8,600) 99,500 Net cash provided by operating activities $249,500 Cash flows from investing activities: Purchase of equipment (20,400) Cash flows from financing activities: Repayment of long-term borrowing (18,500) Net increase in cash $210,600 Cash balance at January 1, 20X9 66,000 Cash balance at December 31, 20X9 $276,60

 
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